Perspectives On 'Water for Development': Financing Africa's Infrastructure
A Q&A with Malinne Blomberg, Chief Financial Analyst for Water and Sanitation for the African Development Bank
By Julie King
There was a diverse range of industries that came together last month for the 2015 SIWI World Water Week conference in Stockholm. The theme for this year’s conference was ‘Water for Development’.
Critical to the actual delivery of water and sanitation services for the Continent of Africa is the financing and assistance made available by the African Development Bank (the ‘Bank’ or ‘AfDB’). A regional multilateral development bank that was started in 1963, the Bank’s mission has remained simple: “To promote sustainable economic growth and reduce poverty in Africa.”
During World Water Week, I interviewed Malinne Blomberg, Chief Financial Analyst for Water and Sanitation for the Bank. The Q&A follows.
From the perspective of a regional multilateral bank, how does this sector define ‘sustainability’?
“We look at sustainability broadly — financially, commercially, technically for the infrastructure, environmentally. For water projects this includes analysis of the water resource, the risk of pollution of groundwater from bad sanitation systems, and the impact of climate change. It is the social angles that drive sustainability for us — i.e., that the systems will be used, over time, by the intended recipients. We look at the gender context of a project and whether the services are sustainable for all, and incorporate targeted measures such as social connection funds to ensure vulnerable households are covered.
“All of our projects are subject to a social and environmental assessment. With our new strategy 2013-2022, the Bank is placing even greater emphasis on the sustainable management of infrastructure put in place and the environmental aspects. This is still the main issue for development projects as unsustainable systems deteriorate quickly, requiring expensive reinvestments that could otherwise have been used to expand the access of water services to more people.
“My opinion for what the solution is for sustainability — and what the main challenge is — is governance, governance, and governance. Like it is for real estate — they say it is all about location, location, location. For me it is governance, governance, and governance — and more Project Preparations as the limited number of good projects ready to be financed is a greater issue than the perceived lack of funding in the sector. [I]n my experience, well prepared projects usually attract funding.
“The utilities that are working well have autonomy, even if it is government-owned, to run their own operations. Government will always retain its role as policy setter and regulator, and for the foreseeable future will remain involved financially for borrowing. But there needs to be a ‘corporatizing’ of utilities, allowing the utilities to be run like companies, not like ministries. The staff recruitment process is different, there is a different compensation package, corporate personnel can be hired, fired, and paid bonuses for performance. With the right incentive systems and the right people in place, problems get solved and performance improved.”
As a multilateral financing institution specifically focused on economic and social development of African nations, what is meant by “engaging the private sector”?
“Broadly, it is anything that involves the private sector. This includes operators for delivery of services, manufacturers/suppliers and financiers, and any permutation of this is ‘the private sector’. Our aim is to increase their contribution and stake in the sector in terms of financing, technology, and management systems. For WASH [Water Sanitation and Hygiene] projects, the government has responsibility to ensure the enabling environment (policy, regulation, coordination, planning, and monitoring). [H]owever, they do not necessarily have to provide the water and sanitation services themselves. This has historically been perceived to be a solely public domain, but services can just as well be provided by private entities.
“Like BOTs [Build-Operate-Transfer] — i.e., the financing, development, and operations are ‘private’, [b]ut not for the whole sector. Large-scale BOTs for a whole utility and concessions — we have seen that this really hasn’t worked in Africa. BOTs work better when they are unbundled. Water infrastructure needs a long-term payback and appropriate tariff levels, which makes them perceived as risky. It goes back to the social nature of projects and political nature of tariffs.
“However, it is just in the past five years or so there [has been] a shift in the general view on the continent and a general acknowledgment for both the need to pay cost recovering tariffs (whether publicly or privately run) and also for involvement by the private sector. South Africa is providing a minimum quantity of water free. [H]owever, in countries where populations have been promised free water services, it has hardly ever materialized. Now people are saying ‘no,’ it doesn’t work. Still, when we advocate for tariff increases, we do keep one eye on the election cycle as it tends to be politically sensitive. Over time, though, the sector recognised that this had to change.
“Management contracts are quite common and are no longer controversial. Now we look at BOTs and at commercial financing, even of public utilities.
“[Another private sector] area, too, is how to expand normal credit lines to other short-term financing needs — for example, to put metering in place in order to keep revenue up. This is one of the quickest ROI, to ensure that metering is in place. In addition to our role as financier, AfDB is also a trusted partner and advisor to its member countries, and we would like to increasingly help utilities in structuring access to commercial finance such as short-term/medium credit lines to finance performance improvement plans. Utilities tend to have steady cash-flow and banks can intercept accounts receivables as security. We’ve had extreme interest from utilities in this. For larger investments, we are looking into the prospects of accessing finance from commercial banks or issue bonds. The African Development Bank in this case has the ability to put up a financial guarantee, usually in cooperation with the government.”
Are you seeing any traction in international development project financing from Impact Investment?
“Global results-based financial (RBF) [1] is not very active in the traditional mode of financing and procurement, partly because RBFs usually requires pre-financing by the implementing agency and is often difficult to put in place. However, this is still one of the more promising opportunities to improve delivery in the sector. Now, more and more we see and acknowledge the need for innovation in terms of financing approach. Even though access to water supply increased with the MDGs [Millennium Development Goals], functionality is only about 2/3, and more alarmingly, over the past years population growth in Africa outpaced the increase in access to sanitation facilities...[I]n 2012 there were 141 million more people in Africa without access to basic sanitation than in 2000. We have not been too successful at ensuring sustainability.
“As a sector, it therefore does not make sense to keep doing business as usual, and we have to take calculated risks in applying alternative modalities. AfDB, having re-confirmed its AAA credit rating, is taking important steps to adapt its support to the needs of its regional member countries. We have a new procurement policy being put in place that is more flexible. We also have an important initiative underway to see how to rethink our main concessional window, the Africa Development Fund. We have been asking questions from the ground: What should it be? What is it for? How should the fund be allocated? The emphasis is on innovation and we have seen the changes in the donor landscape. Traditional donors find it difficult to increase funding. So how can we change things or try something different? We have already demonstrated the use of alternative approaches and financing instruments such as partial risk guarantees in sectors like energy and transport. But in water and sanitation it takes time.”
What is the Bank’s process for providing project financing for WASH projects?
“As we are a bank, projects should come to us prepared and ready-to-finance. Public sector projects are presented to us by the respective county’s government after dialogue and consultation with the Bank’s Regional and Sector Departments. If the projects presented are of lower quality or level of preparedness than desired, we try to not say ‘no,’ but work with the government to improve on it. So our water & sanitation team of about 50 people engage a lot in country dialogue, to support in the project discussions and preparations both before and after the project request is sent to us.
“The focus is not only on technical design. It is about service delivery and whether the project will add that social aspect — ensuring that the vulnerable are included and environment/watershed issues handled. It is how we add value and increase the economic value of the projects.
“If needed, we do a ‘design review’ and improve on the project to get a more holistic and integrated intervention out of it. We look at implementation modalities. But here it is difficult to get the private sector involved because by the time we receive the request for financing, it has usually already been prepared and structured for public financing. Restructuring and unbundling a project to incorporate the private sector as a PPP investment at this point adds on valuable time. Another question in this regard is whether the requesting government would be ready for this; without their drive and buy-in it will not work. So we really have to identify PPPs as part of the upstream discussion.
“For the water side, there is a social mandate involved. However, this mandate is not contradictory to cost-recovering tariffs or private sector involvement. Due to the social mandate, public and concessional donor funds are usually needed for a big part of investments. But we are not setting the bar high enough. The social mandate is, firstly, for there to be sustainable access to water for all, including people in vulnerable areas. It is well recognized that those without access to utility services often pay vendors as much as 10 times more that the utility tariff. Secondly, are those in vulnerable areas able to be connected and what is the mechanism for that — for example, targeted subsidies? Thirdly, are the tariffs structured to balance financial viability with the needs of lower income households — for example, is there a block to tariffs so that everyone has access?”
In your experience, how does the private sector respond to requirements to achieve social mandates?
“Ensuring social standards should not be an issue for private operators. Cost-recovering tariffs that ensure viability in the long term are in everyone’s interest, and the private sector also wants to see connections, etc. in order to recoup their investments. This is where projects can benefit from the private sector collaborating with the public sector. We can present average tariffs and structures that are needed, based on tariff studies we often finance. We can help in identifying the connection plans and policies needed in order for the system to be financially sustainable. So project funds may be used to make connections and to provide incentives to customers to be able to connect to reach economies of scale. In PPPs where there is a public asset holder, they usually take responsibility for the social aspect.
“Regarding project planning and monitoring, the Bank’s role includes appraising and approving the financing as well as monitoring [and] supervising the project for the duration of implementation. Longer-term monitoring, after the financing side is complete, is done by local communities — water-user committees on the local level, usually trained during project implementation. All our projects tend to include awareness campaigns. For us it is the ‘participatory process.’ The project is identified with extensive community consultation. We hear their comments and ideas.”
With the urgency to expand the deliver of water infrastructure throughout the African continent, is the emphasis on building new infrastructure or remediating existing infrastructure?
“Increasingly, we are looking to optimize the water and sanitation systems, as opposed to, or in addition to, financing new infrastructure. Together with the utilities, we determine what big-impact performance improvements are needed; for example, the object might be to reduce water losses by X% in the system, as well as to install metering, increase the tariff, etc. This involves significant dialogue so that the wide range of stakeholders, including the community, are on board and buy into the objectives. We measure everything we can so that we have an idea of what the existing situation is and what it takes to reach the target, to improve the target.”
What happens if a project doesn’t reach its targets and how do you mitigate that risk?
“Then the socioeconomic benefits of the projects will not be realized, and the worst case would be that [the] government may have borrowed but did not get the expected return, as the financing is not performance-based. This is why our preparation and appraisal process is so important, and during that process we incorporate the necessary implementation support, depending on the strength of the implementing agency. Of course, we also learn lessons about what works and not that we incorporate in new financing operations.
“The biggest project implementation risk is the procurement process. It takes a long time. We have to structure it differently for performance-based contracts. And we are interested in results-based financing more. Like most institutions, the challenge is to align such approaches with our own internal KPIs [key performance indicators] and timely delivery, as we already monitor KPIs such as disbursement rates as indicators of implementation status. RBFs may have different disbursements profiles, as disbursement is only made after delivery of results affecting the statistics. This type of consideration and adjustment is an ongoing dialogue supported by our performance-monitoring unit.”
What is the Bank’s vision for its future?
“Our mandate is clear. Business as usual is insufficient for meeting the water and sanitation needs of the African continent. We look at innovation in project design, emphasizing private sector involvement and alternative, results-focused financing mechanisms.
“Regarding sanitation, we are developing an urban sanitation initiative to scale-up innovative pilots that have shown promising results, and to increase private sector participation. It places more emphasis on on-site sanitation than sewage systems, as this is more cost-effective and more easily reaches the unserved. But it is not limited to that; it goes across the whole sanitation chain.
“Overall, we would like to see the private sector take on and expand the service delivery role that governments unwillingly tend to have monopolized. Private operators and service providers can provide toilets based on a wide range of new technologies, offer emptying services, run treatment plants that turn waste to energy and other byproducts. But to do this the private players need financing, and we aim to find means to more effectively channel funding through micro-financing institutions, commercial banks, and government guarantees. It comes down to shifting incentives. For example, instead of government providing free or subsidized toilets to households, we aim to provide liquidity and the appropriate training and market research to financing institutions, to on-lend to households, micro-entrepreneurs, and SMEs [small and medium-sized enterprises] to transform and expand the market. In collaboration with the Gates Foundation, we are identifying what kind of investments we can make, even if it is with smaller projects.”
[1] “Results-Based Financing (RBF) is an instrument that links financing to predetermined results, with payment made only upon verification that the agreed-upon results have actually been delivered.” This is the definition used by the World Bank as it has been applied to financing in the health sector: www.worldbank.org/.../AHF-summary-report-092013.pdf